Wednesday, September 25, 2013

"The contribution of this book, we think, is to offer a fundamental explanation
of endogenous growth that is both quantifiable and consistent with the laws of
thermodynamics. Moreover, the new theory is consistent with the notion that the
causal relationship between GDP and the so-called ‘factors’ (K, L, U) is not
simply unidirectional and deterministic, as the standard (Solow) model implies.
Rather, the relationship is a two-way street, analogous to Keynes’ oft-quoted
misstatement of Say’s law, namely that ‘supply creates its own demand’ (Keynes
1936).(1) In the case of useful work, the idea of growth as a positive feedback
process was introduced in Chapter 1 and re-iterated in several places
thereafter.

At this point, it is worthwhile to point out that a number of
economists have discussed the so-called ‘rebound effect’ of energy efficiency
improvements (for example, Brookes 1990, 1992, 1993; Saunders 1992). In brief, the
‘rebound effect’ has been introduced by skeptical economists to counter the
claims of so-called ‘efficiency advocates’ in the context of discussions of energy
conservation and greenhouse gas reduction policy.(2) The efficiency advocates’
usually cited claim – on the basis of engineering studies – is that improved
efficiency can sharply reduce the consumption of energy and hence of fossil
fuels, which are the source of greenhouse gases and other pollutants.

The efficiency skeptics point out that improvements in energy
efficiency generally result in less energy savings than the efficiency
advocates claim, because lower operating costs make energy-using applications
more attractive and thus increase demand for energy services over the baseline.
In fact, it can be argued that the rebound effect is exactly the mechanism that
drives economic growth, under another name.

In a mature economy, the increases in demand are not so great as to
compensate for the savings. Econometric studies suggest that a 10 percent gain
in efficiency in motor vehicles would only increase demand for vehicle use by 2
percent, not nearly enough to use up all the efficiency savings (Khazzoom
1987). Some other estimates suggest more dramatic rebounds, although the issue
is highly contentious.(3) However, there is general agreement that greater
efficiency and lower operating costs lead to greater consumption, thanks to a
non-zero price elasticity of demand.

By the same
token, higher costs will certainly reduce consumption, just as the advocates of
carbon taxes assume. However, the consequences of a permanent increase in
energy costs and consequent increases in capital and other costs have not yet
been taken into account in most long-range economic forecasts.

The most important implication of the new theory, up to now, is that
future economic growth is not guaranteed because the efficiency gains that have
driven growth in the past may not continue. Economic growth depends on
producing continuously greater quantities of useful work. This depends, in
turn, upon finding lower-cost sources of exergy inputs or more efficient ways
of converting higher cost inputs into low-cost work outputs. In a world where
the cheapest sources of exergy seem to be approaching exhaustion, the key to
continued growth must be to accelerate the development of lower-cost
alternative technologies, and policies, that increase conversion efficiency.

Meanwhile, if
the rate of technological advance fails to compensate for the combination of
approaching resource (notably cheap oil) exhaustion and policies needed to cut
back on carbon dioxide emissions, we have to anticipate the possibility that
economic growth will slow down or even turn negative. Global depression in the
coming decades seems to us to be a serious risk."

Robert U. Ayres, and Benjamin Warr,The Economic Growth Engine: How Energy and Work Drive
Material Prosperity, (Cheltenham: Edward Elgar
in association with The International Institute for Applied Systems Analysis ,
2009), 296-297.

NOTES

Say really meant that a produced good
represents demand for other goods, and not that every produced good will
be sold (Say 1821 [1803]).